Federal
energy regulators improperly calculated how much money energy companies should
refund to California
consumers, and the state should get another chance to argue for $2.8 billion in
overcharges on electricity sales in 2000, the Ninth U.S. Circuit Court of
Appeals ruled yesterday.

Handing
Attorney General Bill Lockyer a long-fought victory, the court said that the
Federal Energy Regulatory Commission “abused its administrative discretion”
when it declined to bill the power sellers for “rampant” failure to comply with
reporting requirements imposed when FERC permitted them to charge variable,
market-based wholesale rates during the height of the state’s 2000-01 energy
crisis.

Lockyer
said the court agreed with California’s
argument that “the watchdog was sleeping during the robbery, it failed to
enforce its own rules, and it unduly restricted remedies for consumers with
artificial chains.”

The
quarterly reporting requirements at issue are the government’s main mechanism
for regulating the power industry, but the safeguard “was, for all practical
purposes, nonexistent while energy prices skyrocketed and rolling brownouts
threatened California’s
businesses and citizens,” Judge Sidney R. Thomas explained in an opinion joined
by Judges M. Margaret McKeown and Richard R. Clifton.

The
panel declined, however, to order further refunds on its own, but instead
remanded the case to FERC for further proceedings.

California
has asked FERC to order $9 billion in refunds; FERC has said that’s more likely
to be around $3 billion—the estimated amount overcharged on sales between Oct.
2, 2000, and June 20, 2001.

The
commission had rejected California’s
bid to expand the refunds to include sales made between May and October 2000, a
period in which energy companies failed to file the quarterly rate reports.
FERC said the failure to file those reports amounted to “essentially a
compliance issue.” To remedy that, FERC said it could only order the refiling
of those reports.

The
appeals court disagreed, saying FERC had “broad remedial authority to address
anticompetitive behavior” and had ordered refunds in other cases where
wholesale energy companies failed to file the quarterly price reports.

Thomas
rejected the state’s argument that FERC lacked authority to approve the
market-based tariffs. He noted that while schemes allowing energy companies to
charge market rates, rather than to set a fixed rate subject to regulatory
approval, were disallowed by the Supreme Court in MCI Telecommunications Corp. v. AT&T, 512 U.S. 218
(1994) and Maislin Industries U.S., Inc. v.
Primary Steel, Inc., 497 U.S. 116 (1990), those cases did not
involve the kind of safeguards FERC imposed in the California market.

“[T]he
crucial difference between MCI/Maislin
and the present circumstances is the dual requirement of an ex ante finding of the absence of market
power and sufficient post-approval reporting requirements,” Thomas wrote.
“Given this, FERC argues that its market-based tariff does not run afoul of MCI or Maislin,
and we agree.”

He
also rejected the state’s claim that FERC should have mandated more or
different reporting. The agency, he said, “has broad discretion to establish
effective reporting requirements for administration of the tariff.”

But
the judge said the safeguard the reporting was supposed to provide proved
illusory since “non-compliance with FERC’s reporting requirements was rampant
throughout California’s
energy crisis.”

He
reasoned:

“If
the ability to monitor the market, or gauge the ‘just and reasonable’ nature of
the rates is eliminated, then effective federal regulation is removed altogether.
Without the required filings, neither FERC nor any affected party may challenge
the rate. Pragmatically, under such circumstances, there is no filed tariff in
place at all. The power to order retroactive refunds when a company’s
non-compliance has been so egregious that it eviscerates the tariff is inherent
in FERC’s authority to approve a market-based tariff in the first instance.
FERC may elect not to exercise its remedial discretion by requiring refunds,
but it unquestionably has the power to do so. In fact, if no retroactive
refunds were legally available, then the refund mechanism under a market-based
tariff would be illusory. Parties aggrieved by the illegal rate would have no
FERC remedy, and the filed rate doctrine would preclude a direct action against
the offending seller. That result does not comport with the underlying theory
or the regulatory structure established by the FPA.”

Thomas
went on to declare:

“[A]s
MCI and Maislin affirm, a market-based tariff
cannot be structured so as to virtually deregulate an industry and remove it
from statutorily required oversight.”

FERC
spokesman Bryan Lee said the commission welcomed “the court’s clarification of
the scope of the commission’s remedial authority” for violations of the rate
rules.

State
Sen. Debra Bowen, chairwoman of the Senate Energy Committee, said the idea that
FERC believed it “lacked the ability to order a remedy has always seemed
ridiculous to me.”

“That’s
just an invitation to rip off customers and hope you don’t get caught,” Bowen,
D-Marina del Rey, said. “Cheaters figure out new ways to cheat the system and
FERC has to have a way to go back and provide redress for illegal behavior.”

The
court decision was hailed as a victory by Gov. Arnold Schwarzenegger, who
called the court’s ruling “fantastic,” and U.S. Sen. Dianne Feinstein, D-Calif.
Both urged the commissioners to act quickly on California’s refund request.

California
has alleged that it was the victim of widespread manipulation of both the price
and supply of energy in a newly deregulated electricity market. As prices
soared, the state faced energy shortages and rolling blackouts. The crisis cost
the state billions of dollars and disrupted energy markets across the West.

FERC
capped wholesale power prices and instituted other changes in June 2001 that
brought a quick end to the crisis. But by then, the state’s largest utility had
filed bankruptcy and two others had billions in debts. The state of California
also rang up billions in debts after it stepped in to help the utilities buy
power for their customers.

The
agency ordered energy companies to refund $3.3 billion, but California wants
the federal regulators to order more refunds from the companies, which include
several subsidiaries of Enron Corp. and Mirant Corp. The companies have denied
wrongdoing.

Mirant
and Enron have declared bankruptcy, which complicates the collection of any
refunds.

“How
much of the that total we would be able to recover, we don’t know. But I would
expect that most of the companies are in good financial condition,” said Ken
Alex, the attorney leading the attorney general’s energy task force.